VAT on services: where to tax?
Which VAT for services?
The answer to this question is not particularly obvious and depends on several parameters. The place of taxation is determined by where the services are supplied. This depends not only on the nature of the service supplied but also on the status of the customer receiving the service. A distinction must be made between a taxable person acting as such (a business acting in its business capacity) and a non-taxable person (a private individual who is the final consumer).
General rules
A distinction shall be made between invoicing the supply of services to a taxable person (B2B) or to a non- taxable person (B2C):
1.1. « Business to Business » Services (B2B)
The country of taxation is determined by appklication of Article 44 of the VAT Directive. The supply of services between businesses (B2B services) is in principle taxed at the customer's place of establishment. . The person liable for the VAT (i.e. the person who has to collect and pay the tax to the local Treasury) will be the customer himself when the supplier and the customer are established in different Member States.
The VAT reverse charge mechanism will therefore be generalized, which will necessarily have a positive impact on the cash flow of companies.
Let's take an example
A Belgian company invoices « management fees » to a French company. This supply of services will be taxed in the country where the customer is established (France) with consequence that the Belgian company shall issue an invoice without VAT while the French company shall auto-liquidate the VAT in its VAT returns in France.
1.2. « Business to consumer » Services (B2C)
Services supplied to private individuals (B2C services) are taxed at the supplier's place of establishment.
Let's take an example
A Belgian company invoices services of intellectual nature to a French individual. This supply of services shall be taxed in the country where the supplier is established i.e. Belgium. The Belgian company shall issue an invoice with Belgian VAT.
Exceptions to general rules
However, in order to ensure that VAT receipts accrue to the Member State of consumption, several exceptions have been introduced:
Common provisions for B2B and B2C supply of services
- Services connected with immovable property (architect, construction work, hotel accomodation, etc.)
- Admission to cultural, artistic, sporting, scientific, educational, entertainment and similar events (e.g. fairs and exhibitions)
- Passenger transport (bus, etc.)
- Restaurant and catering services
- Short-term hiring of means of transport (e.g. car rental for three days)
Provisions specific to B2C services
- Long-term hiring of means of transport
- Service provided by an intermediary
- Services relating to cultural, artistic, sporting, scientific, educational, entertainment and similar activities
- Transport of goods
- Work on movable property
- Intangible services (like advertising services, services of consultants and lawyers, financial) to a non-EU customer
- Electronic services
The expert's eye
To prevent double taxation, non-taxation or distortion of competition, Member States may decide to shift the place of supply of services, which are either inside or outside the EU to inside or outside their territory, when according to the effective use and enjoyment of the service this differs from the place of supply as determined by the general rules, those for hire of means of transport, or certain B2C services to a customer outside the EU.Each Member State is responsible for the implementation of the effective use and enjoyment rule. The use made of the rule must be verified with the Member State concerned.